Southwestern Wear Inc. has the following balance sheet:
|Current assets||$1,875,000||Accounts payable||$375,000|
|Fixed assets||1,875,000||Notes payable||750,000|
|Total assets||$3,750,000||Total liabilities and equity||$3,750,000|
The trustee's costs total $323,500, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $4 million is received from sale of the assets?
Distribution of proceeds on liquidation:
|1. Proceeds from sale of assets||$ ___|
|2. First mortgage, paid from sale of assets||$ ___|
|3. Fees and expenses of administration of bankruptcy||$ ___|
|4. Wages due workers earned
within 3 months
prior to filing of bankruptcy petition
|5. Taxes||$ ___|
|6. Unfunded pension liabilities||$ ___|
|7. Available to general creditors||$ ___|
Distribution to general creditors:
|Claims of General Creditors||
|Application of 100%
|Percentage of Original Claims
|Notes payable||$ ___||$ ___||$ ___||%___|
|Accounts payable||$___||$ ___||$ ___||%___|
|Subordinated debentures||$ ___||$ ___||$ ___||%___|
|Total||$ ___||$ ___||$ ___|
The remaining $______ will go to the common stockholders.
|Proceeds from sale of assets||40,00,000|
|First mortgage, paid from sale of assets||-|
|Fess and expenses||(323,500)|
|Unfunded pension liabilities||-|
|Available to general creditors||3,676,500|
It has no first mortgage, wages or taxes due so only fees and expenses will be reimbursed in the priority claims. That will leave 4,000,000 - 323,500 = 3,676,500 for general creditors.
|Claim of general creditors||Claim (1)||Application of 100% distribution (2)||After subordination adjustment (3)||%age of original claims received (4)|
The total claims for general creditors is less than the amount left over for general creditors so each of them will get the full amount. That will leave 3,676,500 - 1,875,000 = 1,801,500 for the common stockholders.